Page 135 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes
Figure 8.4

The graphs of above relationships are provided in Figure 8.5.

Did u know? Can average cost curve be stair shaped or L-shaped?
Economic theory often mentions U-shaped nature of average cost curve, but in reality, we
come across various other types like the stair-shaped one, L-shaped learning curve or flat
bottomed average cost curve. To take care of these empirical situations, the modern theory
of costs has been developed.
Table 8.2

The LTC curve gives the least total cost for various levels of output when all the factors of
production are variable. Its shape is such that the curve is first concave and then convex as
looked from the output axis. As seen above its shape follows from the operations of the varying
degrees of returns of scale, given the factor prices.
The relationship between LAC and LMC follow from that of LTC curve. Both LAC and LMC are
U-shaped. Further, the following relationships hold good:

1. At the point of inflection on LTC curve (A), LMC takes the minimum value.
2. At the point of kink of LTC curve (B) — where the slope of the straight line from origin
to the LTC curve is the minimum — LAC assumes the minimum value.
3. LAC is the least when LMC = LAC.

4. LAC curve is falling when LMC < LAC
5. LAC curve is rising when LMC > LAC.

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